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Library » Will Reforms Enable Outreach? M-CRIL Review of Rural Banking in India

Will Reforms Enable Outreach? M-CRIL Review of Rural Banking in India
Oct 2008, Microcredit Ratings International Limited

Reviewing role of rural banking system in promoting financial inclusion

This paper looks at the role of the rural banking system, which includes the regional rural banks (RRBs) and the cooperative banking system, in promoting financial inclusion in India.

Rural banks in India have been subject to extensive government and political interference in their operations. They have, therefore, encountered serious financial difficulties. Their performance in recent years, has, however, been somewhat better with 85 percent of the RRBs showing yearly profits. To revive the cooperative system in India, the government amalgamated RRBs with sponsor banks, thus improving the availability of experience and skills to RRBs. The reform program also encouraged RRBs to:

Find new channels of non-interest income;
Introduce more efficient banking services through core banking solutions;
Participate in consortium lending.

The paper states that the reform program has been hindered by political interference, debt waivers and loan remission programs, as well as an indifference to the financial inclusion objectives of RRBs. Further, amalgamation of RRBs into sponsor banks does not accelerate the process of financial inclusion. On the contrary, it might make RRBs pursue larger accounts to the detriment of low-income clients.

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Publisher(s):
Micro-Credit Ratings International Limited